Bond yield shift raises hopes for markets turning point

The number of global bonds trading with negative yields has plummeted in the past fortnight with some investors hailing the move as a key turning point for markets and the world economy.

In the space of three weeks the amount of bonds trading with negative yields has dropped from $3tn to $1.7tn in a sign that borrowing costs may have hit their floor, according to JPMorgan research.

Negative yielding bonds have been one of the most surprising stories of the past year as few investors would ever have predicted that some institutions would be prepared to pay to lend money.

Gloomy expectations of eurozone deflation and stagnant growth combined with the introduction of quantitative easing by the European Central Bank drove prices for bonds up and yields down to such levels that governments including Germany, France and Switzerland were able to sell debt at negative yields.

However, the sell-off in debt markets over the past few weeks has put that trend into reverse.

Switzerland's benchmark 10-year debt, for example, which had traded at a yield of minus 0.26 per cent moved back into positive territory at the end of April.

The move in markets has been led by German Bunds, which this week experienced the highest levels of volatility since the eurozone debt crisis.

John Stopford, co-head of multi assets at Investec Asset Management, said: "This could be a key moment in the bond markets, and the start of the rise in yields. We are not likely to go back to the low level of yields of two weeks ago. The market had gone too far."

But he warned: "We might see more volatility as investors grapple with the changing environment. There are also lower volumes, which could exaggerate moves."

Analysts disagree on the reasons behind the recent swings in bond markets.

Some say its origin is technical, others say a combination of stronger than expected economic data in Europe, sharply rising oil prices and herd instincts from some panicky investors, who jumped on the selling bandwagon, sparked the turn.

It is also a sign that the ECB's quantitative easing programme, which it launched in January is starting to take effect as rising yields in past QE programmes in the US and UK was the signal for economic recovery.

Economists at Oxford Economics said signs of stronger growth and higher inflation had prompted a reassessment of market expectations and the move would prove durable.

Richard McGuire at Dutch bank Rabobank thinks the trigger for the rout was fundamental. "There is reason to believe that a further rise in inflation expectations will ultimately serve to push yields higher," he said.

German 10-year Bund yields, which have an inverse relationship with prices, have risen about 600 per cent since April 17, when the market touched a low of 5 basis points, or 0.05 per cent. They now stand at 55bp, or 0.55 per cent.

The volatility in Bunds, which is traditionally one of the steadiest markets in the world, has taken some investors by surprise.

On April 29, German 10-year yields rose 75 per cent, one of the biggest daily moves in the market since the launch of the euro in January 1999. On Monday last week, yields jumped 21 per cent.

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